Stocks couldn’t hold on to early gains Wednesday, as the market gets skittish and risk in the market elevates. Wall Street, as a whole, seems to expect a near-term pullback.
The S&P 500 fell 0.7%, with the tech-heavy Nasdaq up 0.51%. The 10 year treasury yield rose to 0.71%, still lower than where it was before the late March rebound in stocks. Investors, behaving somewhat cautiously of late, have protected capital by moving into cash rather than treasuries, prices of which have risen considerably.
As the market has bounced from its multi-year low, cash holdings have soared to $4.7 trillion globally, by far the highest amount held ever and up over 100% for the year.
Notably, the S&P 500 is flat since April 17, with gains from big tech keeping it stable. Facebook (FB) - Get Meta Platforms Inc. Report, Amazon (AMZN) - Get Amazon.com Inc. Report, Apple (AAPL) - Get Apple Inc. Report, Netflix (NFLX) - Get Netflix Inc. Report, Microsoft (MSFT) - Get Microsoft Corporation Report and Google (GOOGL) - Get Alphabet Inc. Report — largely companies that can allude recession and maintain strong growth rates with their respective secular industry rends — have crushed the market since then and all rose between flat and 2.5% Wednesday.
Other areas of market leadership Wednesday came from a mix of cyclical and defensive sectors, indicating mixed-messaging on risk sentiment;
On the optimistic side, stocks have done decently well in the past month and a half as states like Florida and California have reopened their economies. But the risk of a re-acceleration in the rate of re-infection of coronavirus remains a sizable risk to stocks, which now trade at rich valuations.
The reason stocks have risen in April even while Wall Street has cautioned is because many asset managers have added to their positions in the equity market minimally, but have maintained a defensive portfolio posture by holding high levels of cash. Investors have been net buyers of stocks, but one wealth manger TheStreet spoke with said he won’t be advising his in-house fund managers to add any stocks until valuation levels are lower.
Credit spreads are point of debate. Stocks pricing in a normal environment and a sharp economic recovery. The S&P 500’s average multiple on 2021 earnings, which have some downside, is 17 times, reasonable for where treasury yields are. But some say the market may soon want to demand a higher risk premium over the treasury market with the virus-related risks out there.
Meanwhile, high yield bonds are trading at a 700 basis point spread over the 10 year treasury, abnormal for a healthy environment, which many bears point to as an indication of stock market vulnerability. But that spread has been coming down gently from over 1,000 basis points in March, as investors give more credit to companies.
Here’s what Wall Street is saying:
Dan Eye, Head, Asset Allocation, Equity Research, Roof Advisory Group to TheStreet:
“[We were] small net buyers, very small [in the past few weeks]. I would say it’s a valuation thing — we’ve got an allocation target for our equity exposure and we brought that up in the middle of March and as the market has rallied, we don’t see those same disconnects so we’d rather sit on our hands for a while and wait for another fear. We’re holding about 5% or 6% [of total portfolio allocation] cash right now. [For next few weeks] no real hard and fast plans to sell anything or eliminate positions from the portfolio.”
Lori Calvasina, Head, U.S. Equity Strategy, RBC Capital Markets:
"2021 EPS growth forecasts have continued to slip, but still seem too aggressive. Further downward revisions are likely to contribute to choppy conditions in the US equity market in the months ahead. (2) Although companies aren’t providing much official guidance, their commentary suggests investors need to prepare for a long, slow and uneven recovery, a path that isn’t currently priced into the stock market. (3) Health Care jumps out to us as one of the brightest spots of reporting season so far at the sector level.
Jeff Buchbinder, Equity Strategist, LPL Financial:
"We continue to follow our Road to Recovery Playbook to help guide us through this challenging market environment. While we are encouraged by the stabilization of new COVID-19 cases and the massive stimulus put in place, stock market valuations are no longer as attractive. Our technical analysis work suggests we may be due for a pullback after the strongest bear market rally since World War II. We do not expect a full retest of the March 23 lows (2,237 on the S&P 500), which is 20% below the market’s close on May 1, but a correction of 10–15% would not surprise us, based on the average pullback of 10% following a bear market rally.”
Kevin Nicholson, Global Fixed Income Co-Chief Investment Officer, Riverfront Investments:
"Yields relative to Treasuries are elevated and offer an opportunity for price appreciation as the credit risk premium declines to more normal levels. Hence, in the RiverFront Moderate Growth and Income Portfolios we currently hold approximately 21% in short to intermediate corporate bond exposure and are overweight versus the benchmark."